China s Changing Investment Environment: 2010 and Beyond. U.S. Chinese Services Group May 7, 2010

Transcription

1 China s Changing Investment Environment: 2010 and Beyond U.S. Chinese Services Group May 7, 2010

2 Agenda Navigating risk in a land of opportunity China s 12 th Five-Year Plan (FYP) and opportunities for engagement Q & A February 14, 2010 marks the start of the Chinese New Year of the Tiger 1

3 Navigating risk in a land of opportunity 2 2

4 30 Years of Chinese Economic Development Four Major Milestones $5 China s Nominal GDP Growth ( ) $4 US$ trillions $3 $ Reform and Opening Up begins 1992 Deng Xiaoping s Southern Tour 2001 China s WTO Accession $1 $ Global downturn, stimulus plan, recovery Given recent events, will likely qualify as another turning point in Chinese economic development Sources: PRC National Bureau of Statistics, IMF, U.S. Bureau of Economic Analysis 3

5 China Today Engine of Global Recovery Comparing China s GDP Growth to Other Markets 2008 Growth 2009 Growth 2010 IMF Growth Forecast (Jan. 2010) China U.S EU Japan Brazil Russia India ASEAN 5* Australia World China accounted for 50% of global economic growth last year Source: IMF * Indonesia, Malaysia, Philippines, Thailand and Vietnam 4

6 FDI into China Defying Expectations US$ bln 120 Foreign Direct Investment into China ( ) ? China's non-financial sectors China's financial sector * = 2009 FDI in China's financial sector not yet disclosed Although FDI into China fell 2.6% during 2009, China still had its 2nd best-year at a time when global FDI flows fell 39% Source: PRC Ministry of Commerce (MOFCOM) 5

7 U.S. FDI in China Resilient Despite the Downturn After investing approximately US$64 billion through % of China s cumulative total - U.S. investors continued to favor China in 2009 despite the global downturn Flow of U.S. FDI in China ( ) US$ billion U.S. FDI into China during 2009 was US$3.6 billion a 24% increase from 2008 despite the economic crisis Source: PRC Ministry of Commerce 6

8 Achieving coverage and scale in China The key challenge for U.S. investors in the years ahead Main questions Key determinants Key outcomes Where to compete? A matter of coverage Growth? How to compete? A matter of scale Profitability Positioning your company to have the right coverage and scale commensurate with your stage of development in China is key to sustainable success. 7

9 Pursuing Coverage and Scale World s 2 nd largest retailer 19 stores in Shanghai - with 30 planned - but most recent openings in Changchun, Chengdu, Qingdao, Suzhou and Wuhan Heilongjiang % growth in urban per capita disposable income (2009 vs. 2008) < 8% 8-9% Xinjiang Tibet Gansu Qinghai Jilin Liaoning Inner Mongolia Beijing Hebei Tianjin Ningxia Shanxi Shandong Shaanxi Henan Jiangsu Sichuan Chongqing Hunan Guizhou Yunnan Guangxi Guangdong Shanghai Hubei Anhui Zhejiang Jiangxi Fujian As of Dec. 09,157 stores in 40+ cities since opening first in stores added in in 08 and16 in 07 16% annual revenue growth in China in 09 bright spot globally but sufficient to keep pace with 17% growth in retail sales in China during 09? China s largest foreign retailer, but ranked 6 th overall for 3 yrs. straight 9-10% 10-11% > 11% Hainan = Cities with 5 or more stores Source: PRC National Bureau of Statistics, Carrefour = Cities with 1-4 stores 8

10 Pursuing Coverage and Scale U.S. automakers Relative Market Opportunity New Investment Company 2009 U.S. Sales ( Vehicles) 2009 vs U.S. sales growth (overall market growth) 2009 China Sales (Vehicles) 2009 vs China sales growth (overall market growth) Estimated cumulative investment in China, as of 2008 New China Investment (US$m) Timeframe Big Three automaker 1 2,070,000-33% (-21%) 1,826,424 67% (40%) 5,000 5, Big Three automaker 2 1,620,000-15% (-21%) 440,619 44% (40%) 1, Is your company matching investments decisions to market opportunities? Sources: Corporate websites, media, * Total investment based on publically-available information ** Confirmed US$5 billion investment plan through 2012 announced in December

11 But what about risk? Risk Rater U.S. China India Brazil Russia Economist Intelligence Unit B C C C C Country Risk Rating 1 S&P Sovereign Rating 2 (Local Currency) AAA A+ BBB+ BBB+ BBB Transparency International Corruption Perceptions Index 3 Key 1. October Rating scale from A (least risky) to E (most risky) 2. October Rating scale is divided into ten overlapping bands: AAA (least risky), AA, A, BBB, BB, B, CCC, CC, C, D (most risky); + and denote gradations within the bands Corruption Perceptions Index - Rating scale from 10 (least corrupt) to 1 (most corrupt) Based on these risk ratings, it would appear that doing business in China is no riskier than doing business in other large emerging markets but considerably riskier than doing business in the U.S. 10

12 Managing risk in China Risks, as perceived by U.S. investors in China, change fast Results of the U.S.-China Business Council Annual Member Survey ( ) Top Business Issues in China Rank 2003 Member Survey 2005 Member Survey 2007 Member Survey 2009 Member Survey 1 Trading Rights IPR Enforcement Human Resources Administrative & Business Licensing 2 Transparency Distribution Rights Administrative & Business Licensing Impact of Economic Downturn on China Operations 3 Distribution Rights Transparency IPR Enforcement Human Resources 4 Standards, Technical Regulations Human Resources Competition and Overcapacity Competition and Overcapacity 5 IPR Enforcement Market Access in Services Transparency Market Access in Services Tied at 8 IPR Enforcement /Transparency Effective risk management in China requires constant updating of priorities and not overly relying on past experience Source: US-China Business Council 11

13 So Why is Risk Management in China So Difficult? Three reasons the Learning Curve often does not apply Speed of Change The fast-evolving regulatory and competitive environment means that the nature of risk itself changes rapidly War for Talent High turnover and talent shortages limit the ability to institutionalize learning Diversity of China s Economy Wide geographic, sectoral, and ownership structure differences mean that experience gained from one investment may not apply when making another As it is much harder to benefit from past experience in today s China developing the ability to see around corners becomes essential 12

14 Keeping Pace with China The challenge for Massachusetts exporters US$ million Growth in Massachusetts s Exports ( ) To China: 173% To rest of world: 11% Growth in U.S. Exports ( ) To China: 330% To rest of world: 29% Massachusetts ranked 12 th in terms of exports to China in % of U.S. total - but it had the lowest growth rate of any U.S. state in the top 15 Source: USCBC, Department of Commerce 13

15 12 th FYP Focus areas and opportunities for engagement 14 14

16 China s 5-Year planning (FYP) cycle returns 12 th FYP ( ) Research Drafting Review & approval Implementation October nd National Economic Census launched November 2008 Planning division of NDRC releases draft outline of 12 th FYP November 2009 NDRC announces that drafting of the 12 th FYP is under way, drawing on input from across China Sources: State Council, NDRC, Chinese media, ACMR Early 2010 NDRC submits guidelines for State Council approval March 2010 Premier Wen submits guidelines to 3 rd Plenary Session of the 11 th NPC for approval, allowing drafting to move to next phase March 2011 Final approval at 4 th Plenary Session of 11 th NPC December 2010 Results of 2 nd National Economic Census to be released October 2010 Review and approval of draft at 5 th Plenary Session of 17 th the CCP Central Committee 15

17 From 11 th to 12 th Five-Year Plans Continuity With 2-years left, China s 4 th Generation Leadership (Hu-Wen) is looking to consolidate its legacy - a harmonious society achieved through scientific development 11 th FYP Five Balances ( 五个统筹 ) 12 th FYP Policy Thrust 12 th FYP Targets Urban vs. rural development Accelerate urbanization Increase national urbanization rate from 47% to 50% Harmonious development of man and nature Development between various regions Economic and social development Internal development and opening up to the world Source: State Council, NDRC, Chinese media, ACMR Create an energy-efficient, low-carbon society Reduce disparities through regional integration & specialization Extend social safety net Lessen reliance on global markets for growth; achieve economic rebalancing Undefined interim goal to reduce carbon intensity by 40-45% from 2005 levels by 2020 Increase urbanization rate of Central China from 40% to 48%; reduce energy intensity by 25% from 2008 levels by 2015 Universal basic healthcare coverage by 2020 Increase domestic consumption to 50% of GDP from 36% 16

18 Setting the tone from the top From 4 th generation to 5 th generation leadership China will stick to the road of urbanization with Chinese characteristics, promote the coordinated development of medium and small cities and small towns exert the radiation and driving effect of cities on rural communities and promote the benign interaction of urbanization and the construction of new rural communities." Chinese Premier Wen Jiabao Source: CCTV Premier Wen Jiabao, government working report at the opening of 3 rd session of the 11 th National People s Congress, March 5, 2010 By tapping into new markets and expanding business, companies can absorb rural workforce substantially. This will help create conditions for deeper urbanization. Urbanization in return can boost consumption and drive up the economy. Vice Premier Li Keqiang, remarks during an inspection tour of Pearl River Delta cities, December 15, 2009 Chinese Vice Premier Li Keqiang Source: china.gov.cn Source: china.gov.cn, Chinese media, ACMR 17

19 Rising urban-rural income disparity A leading obstacle to the harmonious society Annual per capita net Income (RMB)* 1978 A difference of RMB A difference of RMB 12,022 * 1978 = 100 Year In 2009, urban Chinese earned 3.3 times as much as rural Chinese compared to 2.6 times in 1978, one of the largest income gaps in the world Urbanization is a key strategy for closing that gap, offering expanded employment opportunities to new arrivals and a source of remittances for those remaining behind Source: National Bureau of Statistics, Ministry of Agriculture 18

20 Meeting the challenge of green urbanization Urbanization Rates ( ) 82% 51% 47% Accounting for just 3% of global surface area and 50% of the world s population, cities consume 75% of the world s energy and emit 80% of greenhouse gases 622m urban residents in China today 2X entire U.S. population - but still just 47% urban; plans to urbanize an additional 325m Chinese by 2030 will strain sustainability Sources: Population Division of the Department of Economic and Social Affairs of the United Nations Secretariat, World Population Prospects: The 2009 Revision and World Urbanization Prospects: The 2009 Revision, Chinese Academy of Social Sciences, China Daily 19

21 National goals, provincial focus, local projects Zhejiang Province Sample Objectives Enhance Zhejiang s role in the regional integration of the Yangtze River Delta Reengineer Zhejiang s core competitiveness Accelerate the development of modern services Reform the social security system Promote new cities Invest in major infrastructure network projects Hangzhou Municipality Sample Objectives Develop high tech industry Transform the southern tier of the Yangtze River Delta into a modern service center Design layout of modern logistics Establish secure system of affordable housing Develop low carbon economy; build a low carbon city Coordinate urban and rural development (i.e. coordinated development of 5-county region around Fuyang and Lin an cities) Sources: Zhejiang Development and Reform Commission, Hangzhou Municipal Development and Reform Commission, 20

22 Identifying emerging urban growth centers Of China s 655 cities, 26 will have urban rail systems under construction in 2010 China intends to invest roughly US$130 billion to triple the total length of urban rail to 3,000 km by the end of the 12 th FYP Harbin Changchun Shenyang Beijing Dalian Tianjin Qingdao Xi an Wuxi Zhengzhou Nanjing Suzhou Shanghai Chengdu Wuhan Hangzhou Chongqing Ningbo Nanchang Kunming Changsha Fuzhou Dongguan Foshan Shenzhen Guangzhou Urban Rail Transit Projects = Under construction in 2010 Sources: PRC State Council and Ministry of Transportation, Chinese media 21

23 Identifying emerging urban growth centers 20 are also located on high-speed rail routes under construction in 2010 China will invest US$300 billion during the 12 th FYP to extend high-speed rail routes Sources: PRC State Council and Ministry of Railways, Chinese media 22

24 Identifying emerging urban growth centers 7 are also cities where demand for power is expected to surge between China is weighing plans to invest nearly US$600 billion to meet rising Xinjiang urban power demand through 2020 Gansu Xi an Chengdu Chongqing Wuhan Changsha Nanchang Fuzhou High-growth power centers = Estimated > 6% annual increase in power demand between 2010 and 2020 = China s first 3 inland nuclear plants (under construction) Sources: State Grid 23

25 Our seven emerging urban growth centers A closer look* All 7 are provincial capitals All 7 have populations of at least 3 million, placing all among the top five in the U.S. Six of the 7 are located in the interior Per-capita urban disposable income growth (2009 vs. 2008) 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% 8.8% 16.0% GDP growth (2009 vs. 2008) 25.0% Retail sales growth (2009 vs. 2008) 12.0% 8.0% 4.0% 8.7% 20.0% 15.0% 10.0% 5.0% 15.5% 0.0% 0.0% Sources: PRC National Bureau of Statistics * 2009 data for Nanchang not available = national average growth rate (2009 vs. 2008) 24

26 Creating sustainable China value in 2010 Key take-aways China is too large and complex to tackle as a whole Study the central government's development goals as a road map for identifying emerging investment opportunities Narrow your investment focus to a few promising geographic locations Understand the many roles of sub-national officials investor, manager, regulator and potential spoiler Think beyond traditional means of investment (M&A and greenfield) Articulate your value proposition and team accordingly 25

27 Deloitte s Chinese Services Group Your Connection to China Thank You M&A in China Deal breakers and pricing challenges M&A in China Structuring and Compliance Considerations Staying one step ahead Hot topics on investing in China China Mergers & Acquisitions Playbook Contact Information: Kris Knutsen Senior Manager krisknutsen@deloitte.com 26

28 Q&A 27

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